Thursday, May 21, 2015

Is
it an ultimate dream? Yes. Is it an economic pride? Yes. Is it a source of
prosperity? Yes. Then, it must be the “service sector”, right?

Less
developed nations has been associated with backward agriculture economy while
developing nations aggressively push their manufacture sector. Service sector
has been seen an important engine of growth to developed nations. Therefore,
service sector is regarded as a dream for every nation, a pride for every
economy and a sector that can generate lots of income.

One
of the benchmark targets in Malaysia’s Economic Transformation Program (ETP) is
increasing the contribution of service sector to 65% of GDP by 2020. The
journey towards service sector has started – but are we ready? In answering
this question, let analyze the trend and the gap.

The Trend: Service versus Others

Best
possible data available through Malaysia Statistical Department are ranged from
1987 to 2013. Taking first and last three year averages, percentage of output
contribution to Gross Domestic Products (GDP) is shown in Figure 1. There are
some classification changes between these two periods of time. Hence, minor
adjustment is made to match the earlier years (1987 to 1989; will be referred
as “Period 1”) to the latest years (2011 to 2013; will be referred as “Period 2”)
classification for better comparison.

Figure 1: Output
Contribution to GDP (%)

(Data
source: Statistical Department of Malaysia)

Service
sector has already the biggest contributor to GDP since Period 1. Its
contribution has increase 10.26 percentage points to 55.37% over the two
periods of study. At the same time, manufacturing sector’s contribution also
increases to 3.82 percentage points to 25.13%. Primary sector of “agriculture,
livestock, forestry and fishing” and “mining and quarrying” collectively
suffered decline of 14.34 percentage points to 15.97%. Construction sector has
minor increase of 0.26 percentage points in its contribution to GDP.

Figure
2 shows share of labor employed as percentage of total employment. Similar
trend to output contribution, service sector has largest share followed by
manufacturing sector. Over the two period of study, labor share of service
sector increase significantly from 47.18% to 60.38% or 13.2 percentage points.
Indeed, all sectors labor share increase except “agriculture, livestock,
forestry and fishing” sector which suffer a drop of 17.77 percentage points.

Figure
2: Share of Labour Force(%)

(Data
source: Statistical Department of Malaysia)

Based
on the trend analysis of output contribution and labor share, it seems that
Malaysia is ready to go from manufacturing to service sector. Indeed, Malaysia
has already completed transforming from agriculture-based economy to
manufacturing-cum-service sector. From the comparison between two periods of
study, Malaysia also has started its transformation from manufacturing to
service sector.

Therefore,
the question should now be extended: Are we ready to transform from manufacturing
to service sector “in the best possible ways” to “achieve ETP target”? In
addition, policy makers should also ask what benefit of developing service
sectors to various citizen groups, especially the youth, golden generation,
women and business group, which ranged from small and medium (SME)
entrepreneurs to big conglomerate.

In the Best Possible Ways

To
get the best possible ways, productivity should be increased, not just
increasing the percentage share of output or percentage share of labor. Productivity
can be measured in term of GDP per labor employed – amount of output each labor
produced – as calculated and shown in Table 1.

Based
on Table 1, mining and quarrying sector shows extraordinary high level of GDP
per labor employed despite having lowest output contribution per GDP and
percentage of labor share per total labor employed (see Figure 1 & 2). This
could be due to activities in this sector (include oil exploration) is both
highly capital intensive and very high selling price, thus did not really
reflect labor work productivity. Ignoring mining and quarrying sector,
manufacturing sector turns out to be the most productive followed by service
sector. Over these two periods of study, manufacturing sector achieved highest
productivity improvement. Perhaps thanks to modernization of agriculture sector
in Malaysia, its GDP per labor also increase a lot. Yet, each sector
productivity increase about two to three times over a period of about 24 years,
which is small.

Table
1: GDP per labor employed

Agriculture, Forestry,
Livestock and Fishing

Mining and Quarrying

Manufacturing

Construction

Service sector

Avg 87 - 89

9.03

325.40

18.66

8.39

13.91

Avg 11 - 13

35.18

778.32

83.75

22.18

53.31

Productivity changes

+ 26.15

(2.9 times)

+ 452.92

(1.4 times)

+ 65.09

(3.5 times)

+ 13.79

(1.6 times)

+ 39.39

(2.8 times)

(Calculated
from data obtained from Statistical Department of Malaysia)

World
Bank data (in our previous article in this column but not stated here) reveals
Malaysia’s overall GDP per labor employed for 2012 is about 18 years, 25 years
and 32 years behind South Korea, Singapore and Japan respectively. Malaysia’s
GDP per labor employed is also ways behind developed countries like
Germany, France, Australia, United Kingdom, United States, Spain and Netherlands.
These countries GDP per labor employed is 1.7 times to 2.7 times higher than
Malaysia. Current growth in productivities for service sector (2.8 times over
24 years) may only see Malaysia reaching developed nations’ current level only
in more than 15 years time.

ETP Target vs. Gap

ETP
targeted service sector to contribute at least 65% of GDP. Based on data from
Malaysia statistical department, service sector contribution to GDP fluctuated
between 44.64% (lowest, recorded in 1988) and 55.91% (highest, 2013).
Mathematically, service sector’s contribution need to increase 9.09 percentage
points from 2014 to reach target in 2020. This is translated into an average
1.30 percentage point per year over seven years. Based on historical trend from
1988 to 2010 - see Figure 3, service sector recorded only an average yearly
changes rate of 0.41 percentages point per year. For the past 26 years (1988 to
2013), service sector only twice recorded consecutives three years of
incensement in share of GDP, which is from 1991 to 1993 and 2011 to 2013.
Therefore, despite Malaysia’s service sector is the biggest economic sector in
term of output and labor usage, it remain a doubt whether this sector can
achieve its 65% contribution to GDP target by year 2020.

National
effort to develop a particular sector (in this case, service sector) can only
be justified if it can bring significant benefits to various citizen groups.
Therefore, what can the service sector bring to four important groups, namely
(i) youth, (ii) senior citizen, (iii) women and (iv) entrepreneurs?

Youth
– Job creation matching population growth

On
aggregate, Malaysia did not have and most likely may not going to have
unemployment problem in near future. Based on Table 2, service sector alone has
created enough job opportunities to match population growth rate.

Table 2: Service
Sector Job Creation

Description

2011

2012

2013

Average

Population
growth (annual, %)

1.69

1.66

1.62

1.66

Service
sector: Labor changes (% of total employed)

3.31

1.62

2.52

2.48

(Data
source: World Bank and Statistical Department of Malaysia)

However,
two qualitative matters cannot be revealed with available statistics. Firstly,
the wages and other employment benefits to youth labor enough to match current
and expected inflation? Manufacturing sector, especially those in
export-oriented industries may suppress wages to maximize competitiveness in cost. In wake of China
“super cheap” products, the only way of survival for non-branded Malaysian
exports is selling at even lower price. Furthermore, higher emphasis on
mechanization (or automation) may lead to jobless growth – have growth but
reduce new job opportunity as labor is to be replaced by machine.

In
service sector, the focus is mainly local market where global price competition
more easily avoided. Hence, there is less pressure to minimize wage and higher
emphasis to improve service quality through human capital development. As
service is localized business, more local youth are needed as compare to hiring
cheap unskilled foreign labors to operate machine through simple and
standardized procedures.

Senior
citizen – To work is win-win situation

Imagine
a country having aging problem, especially significant numbers of old age
citizens (called “senior citizen” or “golden generation”) who did not have
tertiary education level for formal employment beyond retirement age. Instead of
giving social benefits or shedding pity tears, why not offer them paid-job that
suit their ability? This policy enable senior citizen to proudly earn their
living. There are scientific findings claimed senior citizens who actively in
work may improve health (like reduce risk of dementia).

This
policy of employing golden generation has been practiced very successfully in
China and Singapore. At Singapore, one will notice senior citizen working at
various job level (pushing pedestrian traffic light, waiter, security guard,
shop manager, chef to name a few) in various service industry. Those with
higher education may have opted to extend their retirement as consultant,
free-lance and various other jobs.

Women
– Flexi working make big different

On
average from 1990 to 2011 (World Bank statistics), female labor participation
rate in Malaysia is 43.5%, lower than neighboring countries like Thailand
(66.2%), Singapore (52.8%), Indonesia (50.2%) and Philippines (49.4%). Iceland
female labor participation reached 70.2% while United States is 58%, Australia
(55.1%) and United Kingdom (53.9%). One of the main reasons for low female
labor participation is inflexible working hours that causes women (especially
those married with children) to stop working. Service sector may be the best
opportunity to offer flexible working hour and part-time that suit female
group.

Entrepreneurs
– New opportunities

According
to the SMEcensus
2011, SMEs have 98.2% of total establishments,
32.5%
share of GDP and 71.1% share of total employment. More than 87.6% of the SMEs are come from services
sector. Therefore SMEs is an important lifeline of our economy.Developing
services sector may give new business opportunity to current and potential entrepreneurs
especially priority services sectors encourage by ETP. Example are wholesale and retail trade, finance and insurance, transport and storage.

Conclusion

Services
sector has higher potential than other sector and provides benefit to various groups.
So Malaysia moving towards services sector is correct direction but within
services sector must choose a suitable sub-sector to focus.

[Chinese version published at Nanyang Press, 12th January 2015. Available online at http://www.nanyang.com/node/674801. This English version may be slightly different from the Chinese online/printed newspaper version]

Friday, May 15, 2015

Just
like car needs fuel to move, human and science-technology (ST) need funds (capital)
to develop. All these three factors are integrated through various systems and
national policies. Economic progress needs all the four foundations to be
strong.

(3) Capital

In
economic, “fund” usually refers to money invested and called “capital”. Capital
formation can be generated internally through saving, raise from stock market
or through foreign direct investment (FDI) but depleted by debt servicing. In a
two-ways relationship, quality of human factor and science and technology factor
determine effectiveness of capital utilization and generation. Table 3 compares
strength of capital factors for selected countries.

Table 3: Capital Factor Comparison

Country

FDI inflow

(2013)

FDI outflow*

(2012)

Market capitalization

(2012)

Gross saving

(2012)

Gross capital formation

(2013)

External Debt

(2013)

Selected Asian countries

Malaysia

3.71

5.53

156.16

31.87

26.15

35.52

Thailand

3.27

3.45

104.65

30.23

29.24

38.20

Indonesia

2.12

0.61

45.26

30.69

33.64

29.90

Philippines

1.42

0.74

105.58

42.29

19.67

24.62

Vietnam

5.19

0.77

21.14

31.61

26.59

44.08

Singapore

21.40

8.04

144.34

48.08

29.05

N.A.

Japan

0.08

2.07

61.99

21.75

20.79

N.A.

South Korea

0.94

1.93

96.54

34.60

28.99

N.A.

BRICS countries

Brazil

3.60

0.36

54.69

14.64

17.89

19.86

Russia

3.37

2.42

43.35

28.12

22.59

N.A.

India

1.50

0.46

67.97

30.32

30.02

20.78

China

3.76

1.42

44.93

51.01

49.29

9.19

South Africa

2.32

0.76

160.15

12.62

19.36

36.59

Selected developed countries

Germany

0.90

2.56

43.38

24.19

17.00

N.A.

France

0.24

1.52

69.83

17.52

19.57

N.A.

Australia

3.17

0.41

83.95

25.33

28.57

N.A.

United Kingdom

1.92

2.89

122.65

10.86

14.60

N.A.

United States

1.40

2.62

114.92

16.54

19.05

N.A.

Spain

3.31

0.36

75.24

18.93

18.25

N.A.

Netherlands

4.01

(0.14)

84.54

24.78

16.21

N.A.

Note:
All data are in percentage of GDP. “*” negative value (Netherland) implies
“disinvestment” that caused by unfavorable changes in assets versus liability. Gross
capital formation data for both Japan and United States are dated 2012. For
external debt, “N.A” implies no external or data not available.

Source:
All data from World Bank.

Since
year 2007, Malaysia’s FDI outflow is higher than inflow. This trend is expected
for already developed countries like Japan and South Korea but not developing
countries like Malaysia. Malaysia need extra capital to push growth, thus
higher FDI outflow is not helping capital formation. Table 3 shows that
Malaysia seems rely on stock market and domestic saving as their source of
investment capital. For 2012, Malaysia’s stock market capitalization is second highest
among selected countries. Is saving rate of about 32% of GDP is also among the
highest. Overall analysis indicates sustainability concern for Malaysia,
Thailand, Philippines and Singapore as they have very high market
capitalization and saving rate. Thus, room for further boost in capital
formation is restricted to increasing FDI inflow.

On
one hand, Singapore is remarkable that it has achieved double digit FDI inflow
per GDP since 1994 except two years in between. If Malaysia can achieve such
record, its economic growth could be much higher. On the other hand, any global
economy crisis will give severe impact to Singapore.

Malaysia
gross capita formation for 2013 is 26.15%, which is much lower than Indonesia
(33.64%) and China (49.29%); slightly lower than Thailand and India (all developing
countries); and also lower than Singapore, South Korea and Australia (developed
countries). Capital formation is expected to be much higher in developing
nations as compare to developed nations. Thus, statistics in Table 3 imply that
Malaysia is moderately strong in capital factor.

The
only obvious drawback is high debt. Malaysian central government debt has moved
past 50% of GDP since 2009. World Bank data (not shown in Table 3) revealed
this debt stands at 53.3% as at 2012, which almost touching legalized debt
ceiling of 55%. Reaching the limit may cause government shutdown like the
United States. In addition, Malaysia’s external debt at 35.52% of GDP (or 37%
to Gross National Income, GNI) is also a concern and may likely give negative
effect to future capital formation.

(3) System

“System”
in economic has been over-directly link with resources flow and production.
Thus, in this framework, “system” is better viewed as catalyst from scientific (chemistry)
perspective. As catalyst, systems speed up inter and intra reactions between
and within “human”, “science-technology” and “capital”. Figure 1 is reproduced
below to facilitate further explanation.

Border
“ab” represents financial system. It has been commonly known as platform to
allocate internal saving and foreign funds (money) between saver (contributor)
and borrower (user of funds). These monies are used in either pure consumption
or investment into science and technology. Border “ac” is management system
that help human governs capital and utilize science-technology (ST). Border
“bc” is education system that provides knowledge on how human and capital input
can maximize utilization of ST. Ethic or morality (point “a”) is needed to
government relationship between human and capital. Combination of capital and
ST will determine production capability (point “b”). Human and ST create
knowledge-based economy (point “c”). Besides financial, management and
education systems, public service and juridical system are of equal important.
Thus, the strength of “system triangle” is measured from these five systems of
financial, management, education, public service and juridical.

Figure
1: The Four Economic Triangles

“ab” =
financial system

“ac” =
management system

“bc” =
education system

Within “abc”

= public
service system

= juridical
system

Financial
system

Based
on Table 4, Malaysia’s financial sector reach to its population is better than
Indonesia, Philippines, Vietnam, India and China. Malaysia has higher Automated
teller machines (ATMs) and more bank branches (both per 100,000 adults). Yet,
it is very obvious that all selected developed countries (except Netherland) have
higher financial reach than Malaysia.

Malaysia
financial sector has relatively lower risk, measured in term of higher
Capital-to-Asset ratio (CAR) and lower non-performing loan (NPL), as compared
to countries like Japan, Brazil, India, South Africa, Germany, France,
Australia, UK, Spain and Netherland. Surprisingly, Spain NPL has been
increasing rapidly from just 0.7% in 2006 to 8.2% in 2013. High NPL but low CAR
in all the selected developed European countries as well as Australia and three
BRICS countries indicate alarming sign of a new global financial crisis. Thus,
developing countries like Malaysia needs to prepare well ahead and continue
strengthen its financial sector.

Education
system

Based
on Table 4, Malaysia’s literacy rate is few percentage points less than most
selected countries. Nonetheless, it is still proudly high at 93.1%. Malaysia’s
total public spending (PS) in term of percentage of GDP is also comparable
standard with developed nations. Indeed, Malaysia’s PS is much higher than
Singapore, Japan, Indonesia, Philippines and India. Malaysia’s “secondary
pupil-teacher ratio (P/T)” is either comparable or better (lower ratio) than
majority of selected countries.

Thus,
why Malaysia’s education standard is ranked so miserably in international
assessments? In Programme for International
Student Assessment’s (PISA) test in 2012, Malaysia was ranked 39th
out of 44 countries on “creative problem-solving”. Singapore ranked top. The
test also showed only one out of 100 Malaysian students, aged 15 is able to
solve the most complex problems, compared with one in five in Singapore, Korea
and Japan. Malaysia scored 421 in Mathematics (lower as compared to global
average score of 494), 398 in Reading (496) and 420 in Science (501)
respectively.

Universiti Malaya is ranked 151th in QS World
University Ranking 2014 as compared to other Asian universities like National
University of Singapore (NUS) (globally ranked 22nd), University of
Tokyo (joint 31st), Seoul National University (joint 31st)
and Kyoto University (36th). In Times Higher Education (THE) World
University Ranking 2014, no Malaysian university makes into Asian Top 100 that
dominated by universities from Japan, Singapore, South Korea, Hong Kong and
China. India, Thailand, Iran, Israel, Lebanon,
Saudi Arabia and Turkey all have their university among Asian Top 100 list.

Recently,
former finance minister and politician veteran, Tengku Razaleigh Hamza has
voice his disappointment. He lamented the big government spending on educating
sector that failed to improved education quality.

Public
service

Ratio
of real GDP per compensation to public sector employees is presented in the
last column in Table 4. Ratio for Malaysia is 14.2, implying every domestic
currency (Ringgit) spent yield 14.2 Ringgit worth of real GDP. Thus, the higher
this ratio means the more productive (effective) the employees’ in public
sector. From Table 4, Malaysia’s public sector is much more productive than
countries like Thailand, Brazil, Russia and France. However, Japan is almost 6
times higher than Malaysia. Malaysia public sector’s efficiency is also very
far behind South Korea, India and Germany. Even Indonesia has higher ratio than
Malaysia while Singapore is almost double Malaysia’s ratio.

Conclusion

One
of the most important teachings of Sun Tzu in his Art of War is “know ourselves
– both strength and weaknesses”. Thus, it is important to know Malaysia’s
strength and weaknesses. A “four economic foundations” framework comprising
aspects of “human”, “capital”, “science & technology” and “system” is
proposed.

Malaysia
is better than mostly all developing countries in term of “human factor” and
“science and technology factor” but still far behind selected developed
countries. Malaysia has moderate strength in “capital” foundation. Malaysia
seems rely on stock market and domestic saving as their source of investment
capital. Yet, most critical concern is high level of debt. In term of “system”,
Malaysia’s foundation in “financial system” and “education system” is good.
Yet, in various international standard comparisons, we failed badly in
education quality while the competitiveness of domestic financial institutions
still remains a doubt. Perhaps, there are other qualitative factors that cannot
be captured by merely quantitative data. Among the most important qualitative
factors may be corruption and ineffective over-protectionism.

To
progress into developed nation as in Vision 2020 and Economic Transformation
Program (ETP), we need to immediately strengthen all the four economic
fundamentals without fear and prejudice.

[Chinese version published at Nanyang Press, 1st December 2014. Available online at http://www.nanyang.com/node/667497. This English version may be slightly different from the Chinese online/printed newspaper version]